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It may be the last thing you would consider, but remortgaging your house is one of the best ways to save money and give your finances greater flexibility.
Saturday 29 July 2000
Saving readers as much as £5,000 a year is the aim of
The Independent. The figure may sound implausible, but the enormous savings achievable through remortgaging a home could certainly provide a valuable kick-start towards this target.
Saving readers as much as £5,000 a year is the aim of The Independent. The figure may sound implausible, but the enormous savings achievable through remortgaging a home could certainly provide a valuable kick-start towards this target.
What is bizarre is how few homeowners take advantage of these opportunities - just 29 per cent of last month's home loans were remortgages. Clearly many borrowers' believe the savings are not worth the perceived trouble, but the actual difficulties are not great and the possible savings are substantial.
Steve Herbert, a partner at Select Mortgages and Loans, was last week arranging a £289,000 remortgage, having obtained a 2.1 per cent discount against the standard variable rate from Bristol & West over the next 18 months.
During that period this will save the homeowner £9,103 - and as there is no tie-in commitment, the borrower is free to shop around for the best deal again at the end of the term. The only cost to the homeowner is a solicitor's fee to arrange the mortgage transfer, at a cost of £400. There are no valuation or completion fees payable and the broker is paid by commission from the lender. If similar deals can be extended across the life of the loan, the borrower stands to make a total saving over 20 years of £91,000.
"The way to play the game is to look for a deal with no tie-in and no costs," says Mr Herbert. "Go into that, take the discount for a couple of years, then jump ship and find another deal. We have thousands of clients moving from one deal to another."
Among the deals currently available and recommended by Mr Herbert is another mortgage from Bristol & West - offered exclusively via The Mortgage Operation - with a 3.5 per cent discount for the first year and 1.6 per cent for the second. While there is a tie-in, this ends just 15 months after completion of the discount period, with a sliding-scale penalty for moving during that time of between 3 and 5 per cent of the amount repaid. There is a £99 submission fee and a £100 completion fee, but with two year savings on a £100,000 loan possibly in excess of £5,000, these are worth paying.
Mr Herbert recommends borrowers of larger mortgages look at a product available from the Bank of Ireland, which offers a cap of 4.89 per cent on the first year and a discount of 2 per cent on the standard variable rate for the second year, with no tie-in. Borrowers will have to pay other costs and fees - which is why the deal best suits owners of more expensive properties.
Ray Boulger, senior technical manager mortgages with John Charcol Brokers, whose online operation charges for personal consultations but is fees free, suggests closely examining redemption penalties on existing loans before agreeing to remortgage. Howeverif the discounts are large enough, the penalties are acceptable. "With some, the redemption penalty is three months' interest, which may still be worth paying to get another deal," he says.
"Look at what deals are in the market that suit your requirements. Check for fixed interest rates or discounts, and for how long. Then check your existing lender. Some will offer existing borrowers the same deals as new customers, which saves the cost of remortgaging. If they will only offer a retention rate that is not generally as good as the new business rates, you need to ask whether it is worth moving to a new lender. Sometimes lenders will offer something better only when they realise you are serious about doing something."
Mr Boulger says Cheltenham & Gloucester will offer existing borrowers the same rates as new customers, and the Woolwich will do so if specifically asked. Some of the largest lenders, including Halifax, Abbey National and Nationwide, will not give existing borrowers the same deals as for new business.
Generally, it is the higher value loans that tend to be worth remortgaging, while for smaller loans it may be best to push an existing lender to improve its mortgage terms. Birmingham Midshires, HMSL (part of Halifax), Coventry Building Society and Britannia Building Society all currently offer similar deals of 2.25 per cent discounts without penalties, which Mr Boulger recommends examining. One product that is only available through John Charcol, is a Coventry mortgage with a five year cap of 5.89 per cent and free legal and valuation fees.
"There are far too many customers paying standard variable rates for their mortgages, despite the fact that many offers still exist," says Simon Jones, associate at the brokers Savills Private Finance. "The overall savings for many customers may well run into thousands of pounds."
Customers of the recently demutualised Bradford & Bingley, in particular, should begin to examine the market closely, after loan rates rose to meet the future costs of dividends to shareholders. Borrowers should not move loans until after they receive their windfalls - probably payable in December - but after that they may find other lenders offer more competitive deals unless B&B improves its loan rates.
One way of multiplying savings is to deposit each month the equivalent of the reduced interest payment, and use this when next remortgaging to reduce the overall term of the loan. Which? magazine calculates reducing the term of a £60,000 mortgage from 25 years to 20 years can save about £15,000 in interest. The benefits of taking out a longer term mortgage to reduce tax payable no longer holds with the abolition of Miras (mortgage interest relief at source) three months ago.
Simply making an additional payment to a mortgage lender to help pay off a mortgage quicker may not make financial sense. Some lenders, including Halifax and Abbey National on its older mortgages, calculate interest due annually, and repayments during the course of the banks' financial year are not counted for the purpose of calculating the interest payable.
Increasingly, lenders are offering more flexible arrangements for mortgage repayments, which can assist with clearing loans early. These typically allow lenders to make additional payments as often as they want, and interest is recalculated from the day a payment is received. But, it is important to check that so-called "flexible mortgages" really do this as some still only recalculate interest either monthly or even annually.
An even more flexible option is the growing number of combined current and mortgage accounts. These enable the positive balances in current or savings accounts to be used to reduce the money owed from the mortgage, rather than earn interest. Although bank account interest is foregone, the net effect is beneficial as the reduction in mortgage interest is greater.
But while these accounts can make big savings in credit card and personal account interest payments, they may cost more overall as they may well not compete with the lowest cost mortgages available. It is important to compare net costs against other mortgages and consider alternative ways of reducing the level and cost of personal debts.
The way these combined accounts work differs. Virgin Direct's is a comparatively straightforward product, which deducts the current account balance from the home loan balance to calculate interest - but the interest rate varies between 7.1 per cent and 7.7 per cent according to the size of home equity. Halifax's new internet bank, IF, offers a more complex product and slightly better interest rates. IF brings together what are essentially five different products - current and savings accounts, a credit card, personal loan and mortgage - on which balances are charged at 6.8 per cent (with a 1.5 per cent discount for the first six months).
First Active offers several arrangements, including 7.74 per cent, discounted to 6.74 per cent for a year, under a 75 per cent loan to value, and a 6.99 per cent fixed rate. The Woolwich offers a competitive 6.7 per cent, tracked at 0.75 per cent above base rate.
The uncomfortable truth is the mortgage market is an incredible maze of products. With around 5,000 different mortgages currently available, there is good reason why more people are turning to mortgage brokers for guidance and negotiation. Again buyers need to be cautious - while some brokers operate fee free (taking income from commission), others charge fees of as much as 1 per cent of loan value. It is therefore very important to check fees before engaging a broker.
Many brokers now have web sites which include opportunities to calculate whether it is worth trying to remortgage a property, lists of recommended products and search engines to find relevant products. Try John Charcol (www.charcolonline.co.uk), Select Mortgages and Loans (www.selectmortgages.net), Savills Private Finance (www.netmortgage.co.uk), E-Loan (www.eloan.com), Moneygator (www.moneygator.com), Money Supermarket (www.moneysupermarket.co.uk), MoneyNet (www.moneynet.co.uk) and MoneyeXtra (www.moneyextra.com).
What is more, arranging for a remortgage is not difficult. "It is a lot less hassle than people think," says Mr Boulger. "If people have 25 per cent or more equity in their own property, lenders need less information. Some will do a rapid deal with a 'drive-by' arrangement without doing a full valuation. Lenders can get a lot more information from credit rating agencies and can see whether you are meeting commitments on time. If you are that gives comfort for a loan approval, especially as you will be paying less after remortgaging as that is the whole point of it. Otherwise, the lender will need your last P60 and your last three pay slips, which is not very much to produce. You have to fill in an application form, possibly have a valuation done and pay legal fees, but increasingly lenders are offering fees-free deals, as well as a really good rate."
Even where lenders are not offering to meet valuation and legal fees, they may provide a cashback of £500, which should be enough to fully meet the costs. So there is really no excuse for not getting on with possible remortgaging.
Next week we will look at the opportunities for saving money from changing bank accounts. The same levels of savings are not feasible - but they should be worthwhile, all the same.
Independent Partners: Get fee-free expert mortgage advice and find the right mortgage deal for you.
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